Alibaba’s (NYSE:BABA) stock recently tumbled after Chinese regulators derailed the public debut of its fintech affiliate Ant Group. Alibaba holds a 33% stake in Ant, which owns the digital payments platform Alipay.
Ant’s stock listing in Shanghai and Hong Kong was suspended after Jack Ma, Alibaba’s co-founder and one of Ant’s top investors with an 8.8% stake, delivered a controversial speech at a government forum on Oct. 24.
Ma criticized China’s financial regulators, claimed many of the country’s banks operated like “pawn shops” with their collateral standards, and he declared that China needed a new financial platform that would extend credit to lower-income customers who lacked sufficient collateral.
Chinese regulators had already been scrutinizing the ability of Alipay and Tencent’s (OTC:TCEHY) Tenpay, which hold a near-duopoly in China’s digital payments market, to disrupt the country’s mostly state-backed banking sector. Ma’s speech seemingly angered those regulators, who then pulled the plug on Ant’s IPO.
Ant was expected to be the world’s largest IPO, with a valuation of over $300 billion. It was also set to be a defining moment for China’s exchanges since Ant was exclusively listing the stock in China instead of the U.S.
But now, its collapse will cost its underwriters millions of dollars in fees, and a new IPO could take months to file. That’s certainly dire news for Ant Group, Jack Ma, and investors seeking a piece of the action, but was Alibaba’s stock unfairly punished for Ant’s suspended IPO?
Why were investors excited about Ant?
Ant’s revenue rose 38% year over year to 72.5 billion yuan ($10.7 billion) in the first half of 2020. Within that total, its digital finance services revenue grew 56% to 46 billion yuan ($6.8 billion). Its net income rose 21% to 21.9 billion yuan ($3.2 billion).
At the end of June, Alipay served 711 million monthly active users (MAUs), and its app processed 118 trillion yuan ($17.4 trillion) in payments over the past 12 months. Tenpay, which includes WeChat Pay and QQ Wallet, served 940 million MAUs last year, according to a recent Ipsos survey.
Those growth rates are comparable to other hot fintech companies like Square (NYSE:SQ) and PayPal (NASDAQ:PYPL), which are both attracting big institutional investors as the rise of mobile payments, unpredictable macro headwinds, and low interest rates all make traditional banks less attractive.
Square went public five years ago, and its stock has risen more than 22 times from its IPO price. PayPal was spun off from eBay (NASDAQ:EBAY) as a separate company in 2015, and its stock has risen about 460% over the past five years. Many investors likely expect Ant to generate returns that are similar to those of those two fintech leaders, if not better.
How badly will Ant’s debacle hurt Alibaba?
Alibaba previously held an agreement with Ant that granted it 37.5% of the fintech affiliate’s pre-tax profits. But last September, it swapped those rights for a 33% equity stake in the company.
Alibaba’s equity stake in Ant generated 5.32 billion yuan ($752 million) in investment profits, or 4% of its net income, in fiscal 2020. It also generated gains from the previous profit-sharing agreement in the first half of 2020.
In the first six months of fiscal 2021, Alibaba’s stake in Ant generated 7.72 billion yuan ($1.12 billion) in investment profits, or 10% of its net income. The value of this stake would have risen significantly after Ant’s IPO, but it also won’t decline because the IPO was suspended.
Nonetheless, Ant’s IPO could have boosted Alibaba’s profits at a crucial time. Alibaba generates most of its revenue and its profits from its core commerce business — but the segment’s margins have been contracting as it relies more heavily on lower-margin businesses (like brick-and-mortar stores, cross-border marketplaces, direct sales platforms, and its Cainiao logistics network) to boost its total revenue.
A successful listing for Ant could have led to future spin-offs and IPOs for Cainiao, Alibaba’s streaming media platforms, its growing mobile gaming business, and its other non-core businesses. Those spin-offs could boost Alibaba’s profits and cash flows, but Ant’s failure could curb the market’s appetite for future offerings.
Jack Ma no longer leads Alibaba as its CEO or executive chairman, but he still holds a large stake in the company he co-founded over two decades ago. Therefore, any scrutiny of Ma could still impact Alibaba — which already faces potential antitrust probes regarding its leading position in China’s e-commerce market.
The bottom line
Alibaba is still growing at a healthy pace, and analysts expect its revenue and earnings to rise 44% and 31%, respectively, this year. Its Tmall and Taobao marketplaces will continue locking in Chinese shoppers, and Alibaba Cloud will remain Asia’s top cloud infrastructure platform. Alibaba’s stock is also reasonably valued at 30 times forward earnings.
Therefore, the suspension of Ant’s IPO is certainly disappointing, but it shouldn’t impact Alibaba’s near-term growth. However, investors should still see if Chinese regulators gradually tighten the screws on Alibaba and closely scrutinize its long-term expansion plans.
